Poker and Trading – Birds of a Feather

warning – there’s some meta-rambling in this post…

There was a period of time where I played poker “professionally” in the sense that it was my only source of income.  I put “professionally” in quotes because although it was my only source of income, I could not pay my bills on my poker income alone.   But I missed out on what was perhaps the most lucrative part of the poker bubble that began with Chris Moneymaker winning the main event at the 2003 World Series of Poker:  I was never good at online poker.

I’m not afraid to admit this – and there’s a trading analogy here as well: you have to know your strengths and methods, and cater to them, rather than trying to force yourself into someone else’s molds or methodologies.   While I could have sat home and tried to force myself to fit some online poker mold that was unnatural for me and that I hated, I instead ventured out daily to live cash games held privately in NYC.

Sometimes people ask me why I disliked/sucked at online poker, and I have trouble explaining it.   It’s not that when I sit at the table with you I can look into your soul.  Although “feel” is a huge part of the live game, when you’re playing with experienced players, it wasn’t (for me at least) based on specific physical tells like you might read about in a book or see in a movie (no one peeled apart their Oreos and Teddy KGB’d them).   I think it was more that I was used to playing with the same players day after day, and I felt that my biggest advantage was my ability to get a better grasp of what was going on inside their head than they had of what was going on inside mine.

My problem with online poker was that I was just staring at numbers and names on a screen.   In a live game, even if I’ve never played with you, I can tell within 10 minutes what sort of “clue” you have.  This isn’t some special power I have, of course, I’m guessing most poker players would say the same thing.   Online, however, I was lost.  Clueless.  Is my bits & bytes opponent making a savvy advanced play, or is he just a donkey?   No clue.     Yes, I know some of you are quite good at figuring this out – I’m not saying it can’t be done, I’m just saying that I wasn’t good at it!

Now, as online gambling is starting to show signs of making a comeback in the United States, and given that I live in the woods of New Hampshire where, believe it or not, high stakes no limit hold’em cash games don’t just pop up daily, I am thinking that there will be a time where I will have to re-dedicate myself to learning the online game to take advantage of potential opportunities as legalization spreads.   Hopefully, I won’t have to get a Facebook account ($FB, no positions) to take advantage of Zynga Poker ($ZNGA: no positions)  if and when it eventually throws its hat into the Legal U.S. Online Poker ring, but if that’s where the fish are, so be it…

Anyway, let’s get all @bclund and take this back to a trading analogy, shall we?   Most of us are, by nature, mean reverters: we’re hard wired to buy low and sell high.    I wrote a post about this topic a few years ago, but the cliff notes are that momentum strategies – the “opposite” of mean reversion, in a way – are the ones with the fat positive tails – buy HIGH can be where it’s at.  Note, I didn’t say buy high IS where it’s at – and I think I explained this concept clearly previously.   I think Josh Brown’s recent post “money doesn’t follow value, it follows performance” is saying something very similar about the power of momentum.

But does this mean you should just run out and start buying stocks making new highs?  Of course not.  There’s a METHOD to all methodology, and it’s not just about blindly chasing momentum.   What I have found, personally, is very much in line with the data that Jeff Degraaf illustrated, which I talked about in the earlier post:   when you’re early in the momentum trade, you get whipsawed like nothing else:  the average return of a trade is actually negative.  You end up with a lot of small losers, and then, hopefully, the HUGE winner.   Now, this is where methodology, tilt, and the online poker analogy come to tie this whole story back together.   It’s easy to get whipsawed repeatedly trying to catch a big momentum move.   Perhaps I suffered this fate because my methodology was wrong and I was entering trades prematurely – but that’s something that I needed to work out, just like I need to work out an effective adaptation to the online version of the game I love to play live.

So this post kinda rambled back and forth across the topics of poker and trading.   My poorly-stated (perhaps) point is that the two endeavors have many traits in common:  there is someone trying to take your money on the other side of the trade/table, you have to avoid getting thrown off your game, and there are many different ways to play the game: I find that I have the best success when I do what comes naturally, rather than trying to imitate what I see other people doing, or to try to fit myself into someone else’s mode/model.

Momentum and Mean Reversion

Fear and Greed


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